MANY business owners trade via a company. A company is a separate legal entity and it provides a measure of protection to the shareholder/director.

However, it is also a separate entity for tax purposes and to access business profits. Often both company and the individual have to pay tax.

Tax rates can be whopping and there is a large difference in tax payable depending on whether you take profits out as a dividend or as a bonus. There are also a number of ways you can take profits out with much lower tax rates.

Let me introduce you to Harry and Deborah. They have been married for 25 years, during which they have raised three children, now aged 17, 19 and 21 and still in education.

Harry owns a profitable company, and Harry pays himself £100,000 a year. He has no other income. Deborah has some investments generating about £10,000 per year. Deborah and the children help out in the business but are unpaid. The company is expected to make profits, after Harry’s salary, of £250,000 this year, and Harry has decided to allocate a gross amount £10,000 (i.e. before all taxes) to make a bonus payment to himself.

Harry is mortified to find out that, of the £10,000, a massive £6,660 has to be paid to HM Revenue and Customs. He has asked what can be done, and below are some ideas:

1. Harry could pay a dividend instead – the taxes payable would fall to £5,780. Taking into account the higher rates of income tax and the fact that NIC is payable on earnings, a dividend is much more tax-efficient.

2. He could give some shares to Deborah and pay a dividend – the tax rate on her dividend will fall to 20%.

3. He could make sure all expenses have been reclaimed – it seems obvious but is often overlooked. Harry has not been claiming 45p per mile for his business travel and travels over 10,000 miles, so that could be £4,500 tax-free.

4. Harry could think about paying Deborah and the children for the work they do. It must be genuine and HMRC tend to challenge money paid to family members. It would make sense for Deborah at least to have a formal employment as this will have longer-term capital gains tax benefits if she is given some shares.

5. Harry could make pension contributions by the company. This will save employer’s NIC of 13.8% and employee’s NIC of 2%. In an ideal world, Harry and Deborah should have a legal and financial review.

To find out more about this topic and how you can protect your business, Dickinson Dees is hosting a seminar on November 22 at their offices on St Ann’s Wharf, Newcastle. See www.dickinson-dees.com  or email events@dickinson-dees.com

:: Allan Holmes is an expert in wealth management at the Newcastle-based law firm Dickinson Dees.